How to be your own venture capitalist

By Jason Rose
Tuesday, 03 July 2012

feature-venture-capitalist-thumbSo, you are thinking about launching a new business.


The best advice I can give you is that before you push “go” and invest all of your time, money and reputation in your new start-up, pitch it to a venture capital fund.


Now, I don’t necessarily mean a real VC fund. I think there is a lot of value pitching it to an imaginary VC fund.


If you can’t construct an argument that would get professional investors to back your new venture, I would think long and hard about launching at all.


Why is that?


VC funds have one goal – to make money. They are looking for the next big idea that will earn their investors the returns that justify the risk of backing the unproven.


And they are also aiming to further build their own reputations among potential future investors.


A VC fund will dispassionately look at your concept and tell you whether they think it’s commercial.


They won’t base their decision on whether they like you or think you’re clever. They won’t base their call on whether they want to see you be successful.


They will simply look at how likely your concept is to succeed.


And the truth is that you will most likely find it very hard to convince them, especially if your product is still only conceptual and/or you don’t have a proven track record. That in itself should tell you how hard it is to build new businesses.


But being a little more optimistic, what are some key questions a VC fund will probably want to know that you should be asking yourself too?


Here are the top three questions you should be grilling yourself on:



1. Is there are super quick and cheap way to test this idea?

    It doesn’t matter how clever you are. It doesn’t matter how much experience you have or how much research and analysis you have undertaken.


    There is simply no way of knowing whether a particular idea is going to work.


    In the words of the Prussian military thinker von Clausewitz, “No plan survives first contact with the enemy.”


    The real world has a habit of proving that we humans are not all that brilliant at predicting the future.


    Smarter, more connected and experienced people than you have launched businesses, supremely confident that they would work, only to find that they were completely wrong.


    What’s the point?


    If your proposition to a VC fund is that they will need to invest hundreds of thousands or even millions of dollars and then wait years to see if there is even a market for the idea, it is unlikely to get support from a VC fund. Nor should it get support from you!


    That doesn’t mean you should abandon the concept.


    What it does mean is that you should try to find a quick, easy and cheap way of launching a beta version of the offering.


    People seem to get caught up on analysing the size of the market. Who cares how big the market is if your product is never going to capture any of it?


    So, first find a quick, cheap and easy way to get a version into the marketplace and then use the results of this trial to decide whether it is worth proverbially betting the farm on rolling out the version with the whistles and bells.


    If you then do decide to bet the farm, you can at least do so with far greater confidence. And at that point, the size of the market becomes relevant because you now have a proven product to start capturing market share.



    2. Are you the guy(s) or gal(s) to pull it off?

      Just because you have a product that has some interest does not mean you necessarily have a viable business yet.


      So often with start-ups, everyone gets caught up in the genius of the idea and forgets success often relies far more heavily on the genius of execution.


      Look at the iPhone. Yes, it was a great idea but it was the way that it was executed in terms of design and interface and the surrounding infrastructure that made it brilliant.


      It was a great idea coupled with peerless execution that made it the phenomenon it is.


      The point is that you need to have a complete team with all the necessary skills to realise the potential of your idea.


      Let’s say you have a great new internet-based idea for the financial services sector. And let’s further assume that your background is in IT.


      The immediate question is what sector-specific experience do you have?


      Without a strong understanding of and connection to the financial services industry, a VC fund would be nervous that you will be too much of an outsider to truly penetrate that specific industry. And it should worry you too!


      What if your partner spent 15 years working in various banks and wealth management companies?


      Well, suddenly, you are looking far more likely to be able to successfully roll out your new product into your chosen market.


      What about sales experience? Management experience? Marketing experience? You need to plug all these holes to give a VC fund the confidence you have a truly well-rounded team to be successful.


      That doesn’t mean you need to have all of these people on staff from the outset. You might find a non-executive mentor with many years of financial services experience who can open doors for you and an outsourced marketing partner to help you roll out your product.


      The point is, however, that you wouldn’t want to proceed without these boxes ticked.



      3. How are you going to market it?

        You could say that we are living in the age of the start-up. There are so many smart people out there pushing so many fantastic ideas. It’s a cliché to say it, but it’s getting harder and harder to cut through the clutter.


        The question a VC fund is going to ask you once you have demonstrated that your concept has legs and that you have the management team to pull it off is how you are going to get the world to care about it.


        Unfortunately, it’s not easy. It is incredibly frustrating to be sitting behind your desk convinced you have a brilliant idea without any customers using it.


        Welcome to the real world.


        Do you have a marketing plan that is going to work? That involves a lot more than saying you are going to do some email marketing, you are working with an SEO company and plan to do some advertising as well.


        If you are going to spend a heap of time developing a cutting edge idea, you better have a cutting edge way of rolling it out too.


        And that is a lot more than regurgitating some buzz concepts from the latest marketing self-help books.


        Moreover, you better be able to show that you have a sufficient budget to fund your marketing program.


        And it better include sufficient redundancy for the first two major initiatives (at least) that are most likely to fail to achieve anywhere near their goals.


        VC funding is tough


        Yes, getting money out of professional investors is hard. People who have been around the block are naturally reluctant to hand over significant sums of money to unproven people and unproven concepts.


        And so should you be. You need to demonstrate the same clinical and dispassionate analysis that a VC fund would undertake of your business plan.


        Be just as ruthless because, in truth, you have a lot more at stake.


        Jason Rose is the joint managing director of online media buying website

        His regular blog, “The Startup Mindset,” can be found here.


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